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December 15, 2010 - Phil Hodgen

Should you give up your green card before December 31, 2010?

We do a lot of work with people who are making a deliberate exit from the United States — giving up citizenship or giving up their permanent resident status.  “Permanent resident” status is known in the real world as having a green card visa.

“Pretend” sale, but real money payable

For people who have held a green card for a long time, there can be a massive, unexpected, and catastrophic income tax due to the USA when the green card is relinquished.  This is the exit tax.  For U.S. tax purposes you are treated as if you sold everything you own on the day before you gave up the green card.  You are treated as if you received a lump sum distribution of your pensions.  Your IRA is treated as if it was distributed to you in a lump sum.

These are all “pretend” events but the tax due is real.

Look at Form 8854 (PDF).  This is where the fun happens.

What does “in” mean?

There are two requirements you must meet in order to be subjected to the exit tax:

  • You are rich enough.  Let’s ignore this for now, but for an easy rule of thumb if your net worth is more than $2 million, you are rich enough.
  • You had a green card visa “in at least 8 out of the last 15 years.”

“In” means one day.  If you had the visa status of being a lawful permanent resident for at least one day in a calendar year, then that counts.

Example

Your lawful permanent resident visa (the green card) was issued to you on December 31, 2004.

For purposes of the exit tax requirement of “8 out of the last 15 years” you will count 2004 as one of the eight years.

If you received your green card in 2004

If you received your green card in 2004 and you want to avoid the exit tax in the future, you should give up your green card visa before December 31, 2010.

Example – give up green card before December 31, 2010

Your lawful permanent resident visa (the green card) was issued to you on December 31, 2004.  You moved to the United States in 2005 and have lived in the USA ever since.

You are thinking of returning to your home country.  You want to avoid the American exit tax.

First, let’s assume your net worth is more than $2,000,000.

Now we have to figure out whether you have had your green card visa “in at least 8 out of the last 15 years.”

  • 2004 – you received your green card on December 31, 2004.  You count that year.
  • 2005 through 2010 – you lived in the United States as a permanent resident.  Count them up.  There are six years there.

You have been a green card holder for 7 years out of the last 15 years.

If you give up your green card in 2010, you will not meet the requirements necessary for the exit tax.  You are exempt.  You do not have to file Form 8854, and you do not have a “pretend” sale of all of your assets.

Let’s see what happens if you procrastinate.  Let’s say you wait until 2011 to give up your green card.

Example – give up green card on January 1, 2011

Your lawful permanent resident visa (the green card) was issued to you on December 31, 2004.  You moved to the United States in 2005 and have lived in the USA ever since.

You are thinking of returning to your home country.  You want to avoid the American exit tax.

First, let’s assume your net worth is more than $2,000,000.

Now we have to figure out whether you have had your green card visa “in at least 8 out of the last 15 years.”

  • 2004 – you received your green card on December 31, 2004.  You count that year.
  • 2005 through 2010 – you lived in the United States as a permanent resident.  Count them up.  There are six years there.
  • 2011 – you held the green card visa for one day in 2011, because you relinquished it on January 1, 2011.

You have been a green card holder for 8 years out of the last 15 years.

If you give up your green card in 2011, you will meet the requirements necessary for the exit tax.  You must file Form 8854, and you have a “pretend” sale of all of your assets.

Immigration rules and strategy

If you are in this situation, get it done in December.  The best strategy involves getting on an airplane and physically walking into a U.S. Embassy or Consulate to do the job.  Half-measures will fail you.  Do it right.

It is possible to give up the green card yet remain in the United States.  An immigration lawyer friend of mine recently told me an interesting anecdote about one of his clients, who showed up at a U.S. Consulate to cancel his green card.  An hour later, mission accomplished.

The gentleman immediately asked the clerk at the Consulate (who had just processed the paperwork to cancel the green card) a simple question:  “May I please have a tourist visa to re-enter the United States?”  He was granted a tourist visa on the spot.  🙂

TL;DR

If you received a U.S. permanent resident visa in 2004, and if your net worth is more than $2,000,000, you face a tax-motivated decision.  If you give up your permanent resident visa (“green card”) before December 31, 2010, you will escape the U.S. exit tax.

Obligatory disclaimer

Go talk to someone experienced in this field.  You need immigration law advice and you need tax advice.  The rules are complex.  The tax rules are brand new and are (to put it mildly) murky.

Also.  Tax is not the only thing that matters in life.  Don’t make life decisions based solely on tax considerations.

This blog post is not advice to you.  I’m not your lawyer just because I wrote this blog post.

Phone

Call me if you have questions about this.  Call +1-626-217-2172.  Google Voice rocks.

 

Expatriation